In order to prevent things going wrong in a relationship or business, having a shareholder agreement is the first step to set out any business.
A shareholder agreement is essential for any business, no matter the sector in which it operates. Therefore, you can learn all about shareholder agreements here and get a template for your business.
Key inclusions in the shareholder agreement:
-
- Preamble
- Recitals
- Details concerning the buyback of shares
- Right of first refusal
- Calculation of the fair price of shares
What Is a Shareholder Agreement?
The shareholder agreement is signed between the shareholders of a company. It describes how the company should operate and also lists the duties and responsibilities of each shareholder.
It not only states the rights that a shareholder of a company holds, but also includes information on the management of the company.
Run your business smoothly by signing our Shareholder Agreement template!
Our time-saving and well-written agreement template protects the shareholders' investment in a corporation and creates an equitable shareholder relationship. Edit and sign our ready-to-use agreement template.
For a copy of the template click below.
When Should I Create a Shareholder Agreement?
The ideal time of using a shareholder agreement is when a company is created and the first shares of the company are issued.
In the process of forming, if the investors find it hard to agree with the terms, it can be a red sign that the future of the company with the shareholders working together will not work well.
There are often cases in which the investors defer creating the shareholder agreement to a later time when the opportunity is ‘more apt’. However, it is important to be solved on time.
Therefore, creating a shareholder agreement at the early stage helps in preventing any disputes that might arise at a later stage, saving the business from unexpected losses.
How Will a Shareholder Agreement Help a Minority Shareholder?
A minority shareholder is someone who owns less than 50% shares of a company. Generally, due to the smaller number of shares, the minority shareholders do not get to have a major say in the goings of the company.
However, a shareholder agreement can prevent this situation. By making certain that minority shareholders can participate in the process of decision making, it protects their interests.
These decisions could involve issuing of new shares, changing of main trade of the company, taking a new loan, etc. They will impact every shareholder, so this agreement will ensure that the minority shareholders are not ignored.
Further, a minority shareholder might also want to add a clause that states that if a majority shareholder is selling their shares, all the other shareholders should get the same offer.
All these clauses of a shareholder agreement protect the interests of the minority shareholder in the company.
How Will a Shareholder Agreement Help a Majority Shareholder?
A shareholder agreement also protects the right of a majority shareholder, by including a clause of ‘drag along’.
This means that if a majority shareholder is selling their shares without minority shareholder’s consent, they will be forced to sell their shares under the provision.
Further, another clause to protect the majority shareholders is to stipulate to whom minority shareholders can sell their shares. This ensures that the shares will not be sold to any competitor of the company or an unwanted party.
How Will a Shareholder Agreement Help Equal Shareholders?
If two shareholders hold 50% shares of the company each, there can often be disputes arising between them. Therefore, a shareholder agreement should detail how these disputes are going to be solved.
If there is an absence of shareholder agreement, the disputes can often lead to improper decisions or inability to make any decision at the right time.
What is Included in a Shareholder Agreement?
In general, here are the commonly used parts in a shareholder agreement:
- Preamble: It clearly describes the parties which are signing the shareholder agreement.
- Recitals: They are the clearly explained goals and the motive of the shareholder agreement.
- Details concerning the buyback of shares: Whether it is optional or mandatory in the event that a shareholder wishes to give up their shares.
- Right of first refusal: It states that the company has the option to buy the shares of a shareholder prior to an outsider getting the option.
- Calculation of the fair price of shares: Whether it will be done on a yearly basis or based upon a formula.
There are several other things added in a shareholder agreement, which are important from a legal point of view. Therefore, it is important to have a legal expert check the shareholder agreement before it is put into place.
Run your business smoothly by signing our Shareholder Agreement template!
Our time-saving and well-written agreement template protects the shareholders' investment in a corporation and creates an equitable shareholder relationship. Edit and sign our ready-to-use agreement template.
For a copy of the template click below.
Endnotes
If you wanted to know what is a shareholder agreement, now you know all about it. Further, you could download a shareholder agreement or other agreements on CocoSign that you might need for business or personal purposes.
DOCUMENT PREVIEW
SHAREHOLDER AGREEMENT
This Shareholder Agreement (this "Agreement") is made as of this ______ day of _______________, 20______ (the "Effective Date"), by and among _________________________________ [Company], a _________________ [State] corporation located at ________________________________________ (the "Company") and each of the individual listed on Schedule A attached hereto (each a "Shareholder" and collectively, the "Shareholders").
ARTICLE I
PURPOSE
1. Shares. The Shareholders own all of the outstanding shares of the Company (the “Shares”) in the amounts outlined in Schedule A. All Shares owned by the Shareholders or acquired in the future by any Shareholder shall be subject to this Agreement.
2. Purpose. The Shareholders have entered into this agreement to act together with respect to the management and supervision of the Company.
ARTICLE II
MANAGEMENT
1. Board of Directors. The Board of Directors (the “Board”) shall be equal to the number of Shareholders. Each Shareholder shall have the right to sit on the Board or appoint a member to the Board. The Board shall not be obligated to hold annual, regular or special meetings.
2. Authority of Directors. The Board may perform the following acts on behalf of the Company:
● ________________________________________________________________________________________________________________________________________________________________
● ________________________________________________________________________________________________________________________________________________________________
● ________________________________________________________________________________________________________________________________________________________________
3. Limitations. The Board may not perform any of the following acts without the unanimous written consent of all of the Shareholders: (Check all that apply)
☐ Merge or sell or transfer all, or substantially all, of the assets of the Company
☐ Issue additional shares of any class or any rights related to shares of any class
☐ Voluntarily dissolve the Company
☐ Other: ________________________________________________________________________
_________________________________________________________________________________
4. Expenses. All expenses in connection with the management and organization of the Company will be paid by the Company.
7. Headings. The section headings herein are for reference purposes only and shall not otherwise affect the meaning, construction or interpretation of any provision in this Agreement.
8. Governing Law. The terms of this Agreement shall be governed by and construed in accordance with the laws of the State of _________________.
9. Disputes. Any dispute arising from this Agreement shall be resolved through: (Check one)
☐ Court litigation. Disputes shall be resolved in the courts of the State of ______________.
(Check if applicable)
☐ If either party brings legal action to enforce its rights under this Agreement, the prevailing party will be entitled to recover from the other party its expenses (including reasonable attorneys' fees and costs) incurred in connection with the action and any appeal.
☐ Binding arbitration. Binding arbitration shall be conducted in accordance with the rules of the American Arbitration Association.
☐ Mediation.
☐ Mediation, then binding arbitration. If the dispute cannot be resolved through mediation, then the dispute will be resolved through binding arbitration conducted in accordance with the rules of the American Arbitration Association.
10. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original and all of which together, shall constitute one and the same document.
11. Entire Agreement. This Agreement contains the entire understanding between the parties and supersedes and cancels all prior agreements of the parties, whether oral or written, with respect to such subject matter.
12. Miscellaneous. ___________________________________________________________________
________________________________________________________________________________________________________________________________________________________________________
IN WITNESS WHEREOF, the parties have executive this Agreement as of the date first written above.
